Cigarette industry

Topics: Cigarette, Tobacco, Tobacco industry Pages: 21 (4070 words) Published: November 19, 2013
International Competitive Analysis and Strategy
Strategy Project

The Cigarette Industry in
Italy and Saudi Arabia
An evaluation of the market attractiveness and a
strategy recommendation for British American
Tobacco in Saudi Arabia

Maastricht University School of Business and Economics
Maastricht, 18 October 2012
Jan Philipp Dülfer (i406112)
Larissa Lindemann (i6060409)
Giulia Marseglia (i6057803)
Diogo Mateus(i6059144)
Course code: EBC 4044
Tutor name: Boris Lokshin
Word count: 3071*

* including all references, sources and table descriptions in the body of the paper

Table of content
1. Introduction…………………………………………………………………………3 2. Evaluating the market attractiveness in Italy and Saudi Arabia...……..…….…4 2.2 General market characteristics.....................................................................………4 2.2 Five forces analysis....................................................................................…….……4 2.3 Final evaluation..............................................................................................………8 3. Strategy recommendation for British American Tobacco in Saudi Arabia.........9 4. Conclusion………………….......................……………………………………..…..11 References………………….…………………….……………………………….…......12 Appendix….………………………………………...………………………….....…......15

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1. Introduction
The cigarette industry is highly controversial. While facing increasing regulations worldwide, it persistently presents large profits for its main players, posing an interesting paradox. Since the 1880’s the worldwide consumption of cigarettes has been increasing, yet at a slower rate in the recent decades (Appendix 1), reflecting the negative growth in sales among developed nations (Guindon et al., 2003). Concerned about public health, governments worldwide have been fighting consumption since the 1990’s through increasing taxation and tightening regulations. However, only 19 countries have comprehensive bans on tobacco advertising and promotion, and only 27 countries have tax rates higher than 75% of the retail price. After the widespread policies of baning smoking from public spaces and having health warnings on the packages, EU countries are soon expected to follow Australia in adopting plain packaging.

The comparison of two fundamentally different market environments in Italy and Saudi Arabia yields vital information on the challenges the cigarette industry faces and the strategic orientation its main players should take. The results of this analysis will be applied in the last part in order to formulate a comprehensive strategy recommendation for a particular company operating in Saudi Arabia.

2. Evaluating the market attractiveness in Italy and Saudi Arabia 2.1. General market characteristics
Appendix 2 summarises important general market characteristics of Italy and Saudi Arabia. It is worthwhile highlighting that despite Italy being the more populated, more developed and richer country, the population in Saudi Arabia is younger and faster growing and annual income per capita too is increasing at a faster pace. In addition, Appendix 2 reveals that smoking prevalence is increasing in Saudi Arabia, however, unevenly distributed between men and women. Moreover, the relative price of cigarettes to average household income which should have a significant impact on the consumption of cigarettes (Guidon, 2003) differs dramatically in both countries. In fact, real prices of cigarettes in the Middle East have almost halved, whereas in the EU they increased by 9,2% (Appendix 3).

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2.2. Five forces analysis Italy and Saudi Arabia
Internal Rivalry
With Herfindahl indices of 3307 for Italy and 3700 for Saudi Arabia, both markets are highly concentrated oligopolies dominated by the same four companies (Graphic 1). PMI1 is - with over half of each market’s sales - the leader in volume shares, followed by BAT2 with less than half of PMI’s shares. Interestingly, JTI3 and ITG4 occupy...

References: ●
Action on Smoking and Health (2007): “Tobacco and global trends”
Besanko, D. Dranove, D., Shanley M. & Schaefer, S. (2010) “Economics of Strategy”,
5th Edition, New York: John Wiley & Sons

British American Tobacco Middle East (2012): retrieved from:
British American Tobacco (2012): “Tobacco and our Products”. retrieved from:
http://www.bat.com/group/sites/uk__3mnfen.nsf/vwPagesWebLive/DO52AD6X?open
Elzinga, K. & Mills, D. (1999), “Price wars triggered by entry”. International Journal
of Industrial Organization 17, page 179–198
Gallus, S., Schiaffino, A., La Vecchia C., Townsend, J., Fernandez, E. (2006). “Price
and cigarette consumption in Europe”
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